Question

The supplier that has the lower inventory cost will also have the lower total cost. True False

Answer 1

The Correct answer would be True.

For a supplier inventory cost is a major cost. To cater the demands of the public adequate inventory has to be maintained. This involves huge funds being blocked on such inventories because it takes time to sell goods and unless these are sold cost remains on the higher side.

Inventory levels are reduced by the suppliers to save cost. One of the major problem of holding substantial inventory is obsolence. Once inventory is obselete it has less or no value.

Most importantly keeping inventories also involve additional costs such as Maintainence and Storage.

When the supplier would hold excess inventory then it would require additional storage space which would require the supplier to rent a warehouse. This is an additional cost of keeping excess inventory. However if supplier maintains relatively adequate amount of inventory the storage cost does not needs to be incurred.

Holding excess inventory would require the supplier to engage additional labor to maintain the inventory. Therefore they will be needed to be paid wages. This additonal cost is simply for maintaining the inventory.

Therefore it can be seen that when inventory costs are higher total cost will be higher (due to storage, maintainence cost) and when a supplier would have lower inventory cost his total cost would eventually be lower as he would not be required to pay for additional costs such as storage and maintainence.

So the statement given in the question is True